1.

Prohibition of Allotment of New Shares to Treasury Stock (Including Allotment of Shares to Treasury Stock or Existing Shares Issued by Non-Surviving Company Which Are Acquired by Surviving Company Prior to Merger (“Merged Shares”)) in Case of Mergers, Spin-offs or Spin-off Mergers of Listed Companies (Articles 176-5 and 176-6 of Proposed Amendment to Enforcement Decree of FSCMA)

Under the current law, shareholder rights, such as voting rights, dividend rights and preemptive rights, are not exercisable with respect to treasury stock. However, due to ambiguity in the laws and court precedents concerning horizontal spin-offs and other corporate restructuring events, new shares have occasionally been allotted to treasury stock, eliciting criticism that major shareholders are using treasury stock as a way to increase their control – an issue often referred to as “Treasury Stock Magic.” To address this concern, the proposed amendment to the Enforcement Decree of the FSCMA prohibits the allotment of new shares to treasury stock in the event of a merger, spin-off or spin-off merger in order to prevent major shareholders from leveraging treasury stock to expand their control, and to improve the regulatory framework in a manner consistent with international standards.

In the event of a merger with a listed company, the surviving company will not allot new shares to, or transfer its treasury stock to, Merged Shares or the treasury stock held by the non-surviving company (i.e., so-called combined shares).

In case of a spin-off or spin-off merger of a listed company, the newly established company by simple spin-off, the newly established company by spin-off merger, or the successor company by spin-off (as applicable, the “Spin-Off Company”) will not allot new shares to the treasury stock held by the original company in the spin-off (the “Original Company”), and the Original Company will not transfer its treasury stock to the Spin-Off Company.
 

2.

Strengthened Requirements for Board of Directors Resolutions and Disclosure of Acquisition, Holding and Disposal of Treasury Stock of Listed Companies (Article 176-2 (6) of Proposed Amendment to Enforcement Decree of the FSCMA; Article 4-3 (1) 3 (o), Article 5-1, Subparagraph 2 and Article 5-2, Subparagraph 3 of Proposed Amendment to Regulation)

If the treasury stock of a listed company accounts for 5% or more of the listed company’s total issued shares, the listed company will be required to prepare a report detailing the shareholding status, purpose of ownership and future plans with respect to such treasury stock (additional acquisitions, cancellation of treasury stock, etc.). The aforementioned report must be approved by its board of directors. Such information must also be included in such listed company’s business report, which is subject to public disclosure obligations.

To ensure the effective monitoring and oversight of the market with respect to the disposal of treasury stock, a listed company that disposes of its treasury stock will be required to disclose the purpose of the disposal, the identity of the counterparty to such disposal and the reason for selecting such counterparty, as well as the anticipated dilutive effect on the value of the listed company’s stock.
 

3.

Elimination of Regulatory Benefits in Acquisition of Treasury Stock of Listed Companies in Trust (Articles 5-2, 5-4 and 5-10 of the Proposed Amendment to Regulation)

The acquisition of treasury stock in trust creates a gap in investor protection, as the current regulations governing such acquisitions are more relaxed compared to those for direct acquisitions. Under the proposed amendment to the Regulation, listed companies will be required to submit a statement setting forth the reasons for an acquisition in trust where the amount of treasury stock to be acquired is less than the amount originally planned and publicly announced, as is required in the case of direct acquisitions. Additionally, a listed company acquiring treasury stock will be prohibited from entering into any new trust contracts until one month after the end date of the treasury stock purchase period. Furthermore, when a trust company disposes of treasury stock during a trust contract period, the relevant listed company will be required to disclose the following in a report on material facts, as is also required in the case of direct disposals: (i) the purpose of the disposal, (ii) the identity of the counterparty with respect to such disposal and the reason for selecting such counterparty, as well as (iii) the anticipated dilutive effect on the stock value of the listed company’s stock.